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Open Banking: Everything You Need To Know!

By April 25, 2024No Comments

For centuries, banks have had a monopoly over the information about their customers. Not only their financial data but private information, like marital status, as well. In modern times, banks can quite accurately guess customers’ behavioral patterns, interests, and lifestyles. All they have to do is combine the demographic data that they already have with the knowledge about our spending habits. This makes banks one of the few organizations that have such direct access to our personal information.

Unauthorized access to this information would have led to severe direct financial consequences and loss of reputation and trust. Banks chose the most effective method at that time to deal with the responsibilities they had. To protect themselves and their customers they isolated themselves from others and did not share the information they owned.

However, in the late twentieth century, technological development showed that the situation could change. And eventually, it did. It took decades but open banking came into the scene and some say that it was inevitable for traditional banks.

Open banking is changing the way we bank and use financial services in the modern world. The open banking market is growing steadily. A report by Allied Market Research announced a 24.4% growth and predicted the market value will reach over $43 billion by 2026.

Open Banking refers to certain reforms which force banks to allow third-party providers access to your banking data – with your consent. For example, there may be an app (which is the third party provider or ‘TPP’) that enables you to see what kind of credit card you could get based on your transaction history. If you are happy for the app to have this information, you grant it access to your personal account data and it receives the information from the bank via an API call.

Previously the bank would have had no obligation to give the app this information and you’d have to do it yourself, either entering transactions into a spreadsheet manually or sending bank statements to the TPP – both options having huge flaws. But due to the Second Payment Services Directive (PSD2) banks can no longer protect personal account data in this way, with the aim being to make financial services more competitive and ultimately better for the consumer.

Businesses offering Open Banking services can be categorized into Account Information Service Providers (AISPs) and Payment Initiation Service Providers (PISPs).

AISPs gain access to your banking data, as in the example given above. PISPs are able to make payments directly from your bank account on your behalf, helping you to save, invest, and more.

Open Banking is a safe way to provide access to financial data. With this technology, financial institutions can share customer data and provide access to open APIs (Application Programming Interfaces).

To externalize these APIs, the matter of security is of prime importance and has been so since the inception of the solution, adopting authentication and authorization protocols that enable safe and reliable access, exposing only the correct data to the right individuals.

Open banking is enabled by a series of technologies, regulations, and services that aim to allow developers to create new banking services, new banking business models, and new commerce capabilities. New customer expectations and technology-centric regulations are important lubricants for open banking to thrive. Three forces combine to make the open banking dream possible: changes in banking regulation, changes in culture, and changes in technology.

Open banking security is a multi-faceted topic. Let’s have a brief look at some of the most important areas.

  • Organizational structure – much like the API standardization example, banks will have to face significant internal restructuring. With technologies merging and redefined, who holds the decision-making keys? The Chief Information Security Officer (CISO) because security issues affect the IT infrastructure? The Chief Marketing Officer (CMO) to drive growth? Conflicting internal interests might create security loopholes.
  • Taking advantage of TTPs – fraudsters and online con artists are relentlessly evolving their approach and trying to find weak entry points. With third-party providers usually being new fintech players and less experienced at dealing with financial crimes, attackers can pose as them, making it hard to differentiate fraud from reality.
  • Endpoints security– endpoint security involves the processes, protocols, and infrastructure necessary for various business networks accessed by distant devices such as tablets, laptops, cellphones, or other wireless devices. This will always be a challenge for open banking adaptors.

Never underestimate the power of habit and routine. People have trusted banks for decades and the system they know not only works, but it’s something they trust and feel secure about. Pitching them the open banking idea and its benefits is a harder task than one might think.

People don’t really have the time or interest for that matter to educate themselves on open banking. Educating them, winning over their trust, and making them regular users of the open banking technology is a process that will take time.

Here is an interesting example from the US, a market that is still a novice in open banking adoption. According to a Mastercard report, over three-quarters of people are linking their primary bank accounts to an external fintech account even though only 14% say they trust this process.

On a more positive note, according to Statista, the number of open banking users worldwide is expected to grow at an average annual rate of nearly 50% between 2020 and 2024. This growth will happen in two main ways:

Banks with open APIs are getting ahead while those who are not using open APIs to improve their digital banking experiences for customers are missing out on new customer bases, revenue, new technologies, and market influence. Expectations about the customer experience have grown as digital banking has become widely accepted. The majority of financial institutions believe open banking will reshape the financial services industry over the next 10 years, though there remain challenges for open banking adoption within organizations

When banks connect their financial data to third-party applications via open banking APIs, they’re letting a specialized team of FinTech innovators streamline the time it would take an internal team to develop new technologies. Internal teams can be bogged down with other work to complete, while FinTech firms are dedicated to refining their processes to offer customers the best financial solutions and payments services available.

We can see in countries with developed open banking regulations, banks are less in need of expensive in-house technology build projects when they effectively outsource the work to FinTech companies who are experts, economical, and benefit from the partnership.

Open banking initiatives allow for FinTech firms to connect with financial institutions’ customer data to provide highly relevant trends and patterns. This is where the value of FinTech’s specialization for PFMs comes into play. With access to Envestnet | Yodlee’s aggregated enriched data that only gets more and more refined over time, banks that use open banking APIs are miles ahead of traditional banks that do not leverage customer analytics as a service.

With open access to customer financial trends and patterns, FinTech APIs can generate personalized banking services in just minutes. All FinTechs need is compliant access to a customer’s data before using artificial intelligence to process it and create personal recommendations to consider, thereby offering improving customer engagement with financial products and their affinity with their online banking platform.

Open Banking is gaining momentum in the Middle East, and while many organizations were slow to recognize the opportunity, several of the region’s largest banks recently launched separate digital banks to test the market.

In fact, financial software provider Finastra found that nearly nine out of ten institutions in the UAE plan to enable Open Banking in the next 12 months. The Central Bank of UAE and state regulators have voiced their support, and the federation’s government has announced its interest in supporting digital banking investments. The governments of both Bahrain and Saudi Arabia have made similar announcements.

In Turkey, new regulations modeled after PSD2 were published in 2020, extending previously published guidelines to require Strong Customer Authentication (SCA) in digital banking transactions. Several Turkish banks provide open banking services through APIs, and Turkish consumers are increasingly receptive to the idea of sharing financial data with banks and third-party providers.

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